Monday, a violent Middle East weekend Sharon on the warpath, Arafat under siege, two suicide bombings and 14 dead finally shoved the issue back onto Wall Street's radar screens, with the markets ignoring encouraging words from the housing and manufacturing sectors to notch a down day for the the Dow. And Tuesday the fears solidified when Iraq urged its oil-producing Arab neighbors to "use oil as a weapon against the enemy" and cut the U.S. off without a drop.
Now everyone's having 70s flashbacks. Stocks sold off across the board Tuesday, with the Dow losing another 49 points, the S&P dropping 10 and the NASDAQ losing 58 (although techs are dealing with internal earnings issues more than geopolitical ones). Crude oil prices, meanwhile, hit six-month highs during Tuesday's session, and coal, natural gas and pipeline stocks followed suit to become the new hot tickets of the week.
Too bad energy is the one sector that no one else wants to see go up right now. Higher fuel prices are bad for the exact businesses that are still recovering from Sept. 11 namely airlines, transportation, tourism and travel, not to mention the slowdown's long-time whipping boy, manufacturing. And if economists have said it once, they've said it a million times all that adds up to a virtual tax hike on consumers, upon whose open wallets this nascent recovery depends.
Wall Street, meanwhile, is waiting for the economic recovery to show up somewhere besides the morning indicators and economists' forecast books namely, corporate America's bottom line. Only when profits start to return to earnings statements will investors declare the recovery arrived and rally accordingly. But higher production, shipping and other energy-related costs particularly when consumer demand is as tenuous as it is aren't anyone's recipe for getting back into the black.
And then there's the Fed, for who a virtual tax on consumers and businesses means only one thing higher prices, without higher profits or faster growth. High energy costs will force Alan Greenspan to step in with interest-rate hikes much sooner than he would like in order to control prices and avoid that 70s bogeyman, stagflation. The very thing that is helping the Middle East push those energy prices up the nascent U.S. and global economic recovery could be those price hikes' first victim.
Is it time to panic? Probably not. Unless and until the Middle East fulfills its worst-case scenario and expands into a full-on, pan-regional war, there's little danger to the global oil supply. OPEC, for one, has steered clear of any Saddam-style threats, and seem to realize that it still has more to lose by declaring economic war on the U.S. than it has to gain particularly with George W. Bush busy courting Arab nations to support his war on terrorism.
But the bane of Wall Street is uncertainty, and the Middle East these days is certainly loaded with that. The worst-case scenario an all-out war could be devastating to the oil-dependent global economy, whether from an embargo or merely a disruption of supply. Merely by worrying about this investors are putting a premium on energy prices that could make their other nightmare a weakling recovery, stunted by inflation and starved for demand come true in the meantime.